DARIAN – evaluare & consultanţă

Last week an emergency ordinance that regulates the valuation as a profession was released, this is truly a milestone in the evolution of this profession in Romania. In nearly two decades of existence ANEVAR (Romanian Association of Valuation) played a determinant role in the birth of this important profession in a market economy architecture and starting from this year forth this profession will be organized, licensed and regulated by an independent body named Unevar (Romanian National Valuation Union) created and recognized by the Romanian Government. This decision is important because it ends the discussions about “who is an authorized valuer in Romania”. Read more…

Valuation english

This is a topic of major concern, especially since whenever we deal with a real estate transaction we also have to deal with the values imposed by notaries. I would like to specify from the very beginning that the values contained in this grid do not result from  assessment methods which are in accordance with international valuation standards used in Romania and which also represent the foundation of the valuation profession. The consequence is that empirical values of the notaries grid can be consistent with the real market values of properties only by pure chance, which may cause discomfort for people and budget, by paying a random fee.

Unfortunately ANEVAR was not consulted and will have to take a stand against this situation in order not to let it appear that the values in these grids can be considered a “surrogate” for the market value, as it is recognized by professionals.

Another side of the story with  possible unpleasant consequences is the fact that the Authority for Property Restitution (ANRP) intends to take into account these grids also, which, as I mentioned, are not consistent with internationally recognized procedures and standards. A consequence of this approach which is inconsistent with the standards could be the major shortcomings of our country in the event of any dispute regarding the amount of compensation at the European Court of Justice, given their controversial nature.

Given these limitations created by the notaries grid, I consider it is about time the mass appraisal, meaning the estimating of value for a large group of properties, quickly, efficiently and accurately, should be brought to the attention of professionals from ANEVAR.

This approach may be actual, especially taking into consideration the fact that, in Romania, it would be the right time for implementing the “ad valorem” taxation, which would be a true reform of real estate property taxation, with beneficial effects on the state budget.

Dr. ec. Adrian Crivii, MAA, REV, FRICS

Valuation english

These days DARIAN celebrates 20 years of formal record made of hopes and ideals at the beginning of private property which occurred at the first part of the last decade in the last century.

After these two tumultuous decades of life, in the midst of the Romanian economy in eternal transition, in addition to goals, strategies and targets to achieve, I traveled with distinguished people next to me on a road full of obstacles but also accomplishments and I can proudly say as a founder that I realized something meant to last during these years.

By honest, qualitative labor and sacrifices, DARIAN has become by its team not only a valuable consulting company if we judge it from the economic point of view, but primarily a school of really professional people, which in reality is the greatest achievement and pride having, I think – even a positive contribution to the development of the valuation profession and of the Romanian economic environment. In these 20 years we have successfully managed to cope with rapid changes in society, our clients’ requests, enriching our knowledge and gaining experience with a young team, in constant renewal.

Ourselves, those working in DARIAN, could not get here without input from our customers, investors of all sizes, financial institutions or either private companies or Romanian or foreign persons who trusted our advisory services to be offered promptly, thing on which were based important decisions in many situations.

Dr. ec. Adrian Crivii, FRICS, MAA

Real Estate Market, Valuation english

There is a simplistic but very actual classification of countries in terms of attitudes towards saving and investment, as it follows: companies with debt which consume and which includes U.S. and most developed countries in the EU, and companies that save and invest – category to which belongs China and other Asian countries with a strong economic development. Unfortunately in the last decade, with emphasis on the recent years, once it entered the EU economic area, Romania is increasingly evident in the first category, so that his public and private debt now exceeds 85 billion euros with increasing tendency of growth.

The profile that Romania has now, without material resources or valuable assets to sell, will lead to the necessity to pay the duty engaged in the most part in labor taxation – which unfortunately is not showing a high productivity. Many Romanian people who have abilities and labor force are living outside the country, where in many cases they are working below their level of qualification and earn only from excessive work. Another category of people is formed by the highly educated and young people who graduate prestigious universities in the west and do not return because here they don’t have a matching job offer – therefore the country can not take advantage of this category’s motivating potential. The latter could constitute the frame of highly skilled labor force with high productivity on which debt burden can be laid.

Unfortunately, as the Romanian society appears today, in a society in which entire communities – several million people – are socially assisted, have a low education or poor or insufficient “work longing”, a very bright future cannot appear. Now, the whole tax effort for the state support lays on less Romanians, entrepreneurs or employees in private firms who thus are not only drained of power but also ended up their hope.

Sacrifices which will have to be made in order to overcome the crisis must be shared equitably among all social classes. Those who produce added value and pensioners who have contributed honestly and have low pensions and the few public employees who consciously pay their debt on increasingly smaller wages. We cannot overcome the current situation without social solidarity and motivation for a better future.

Related to real estate property value, it is still on a downward trend until the moment of exceeding the critical point of growth in nonperforming loans. Prices will stabilize at a sustainable level in line with revenues, labor productivity and saving capacity. I consider the latter being limited, at least in the medium term, due to reasons stated above.

Dr. ec. Adrian Crivii, FRICS, MAA

Real Estate Market, Uncategorized, Valuation english

The years 2006, 2007 and the first part of 2008 were a period of strong expansion of the assessment market due in particular to credit growth and the assessment demand for financial reporting. Darian, after a period in which expansion has strengthened to national presence, has increased with significant annual percentages, for example 70% by 2007 and 15% by 2008 at least at market level having a share of approximately 15-20%.

2008 was the year of ending a peak period when the market was around 30-32 million euros, followed by the effects of the current financial crisis. In 2008, Darian covered approximately 15% of the market, having a turnover of 3.75 million euros. The achievement of this income consisted in approximately 30-35% of the financial consultancy sector and 65-70% of the assessment for the banking sector with significantly different returns between the 2 sectors.

In 2009 the crisis has been accentuated and led to a decrease of at least 20% of the assessment market to the value of 24-25 million euros. The crisis will be stabilized in the last part of 2010, when the assessment market will be about 25-26 million (a significant contribution will have the assessments for liquidation), so that in 2011-2012 coming to reach its prior level and even exceeding 30 — 32 million euros.

The current situation on the Romanian market:

• the market’s atomization, the small firms, the circumstances, related to people working in banks with many casual collaborators, the low quality, which cannot invest in technology / licenses and low levels of valuation services, the difficulty to follow the code of ethics, black charging , massive tax evasion including the labour sector. This facts influences the assessment market transparency and the information about the real players in this market;
• there are no quality services at national level, only circumstantial associations to maximize profits without investments;

The crisis apparently has fostered this situation but certainly will follow a period of consolidation. As a consequence of the effects the crisis, the market will also suffer qualitative shifts for the substantial services from the banking sector, increasing regulations being inevitable after the loss that will be recorded – bring in what will appear in the regulations as a result of the crisis in Europe.

In the business assessing and financial reporting sectors, the market increased in volume and value in the recent years and will be maintained or increased slightly in 2010 (5-8%), following an increase of 10-15% in 2011 and over 15-20% in 2012, when it will exceed the 2008 level.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market, Valuation english, financial crisis, valuation

Romania crosses the financial and economic global crisis in an atypical way. Recovery and prevention measures of the Romanian economy have been taken or too late, or unfairly, preferring to protect revenues of the budgetary sector clearly against the private one, the burden being thus placed on this sector and its employees. As almost always in Romania, government measures have focused on short-term resolution of problems without long-term vision. As a result, the private sector suffered a serious blow (the number of firms closed in 2009 was with 1.500% higher than in 2008), the unemployment rate having climbed dramatically and maintaining its growth rate, the investments in infrastructure, the solution to crisis have been sporadic and mostly insignificant. Firms face a lack of funding. The cost of credit and reducing consumption, especially non-food.

Romania’s public debt exploded during 2009, the state budget being unable to cover the current expenditures, so that it is expected to increase in 2010 to 33% of GDP. The programs taken to minimize the effects of the crisis (see the “First house” program on the property sector) managed by the chaotic manner in which they were announced and implemented, to leave a picture of a state unable to properly manage its resources to meet the crisis, unstable and dignified little effect on confidence in future developments. National opportunities remain still not valued properly.

Real estate industry, which enjoyed the bubble’s effects (income for companies and employees) was strongly affected by the financial crisis, this sector felt it most strongly.

Economic recovery will be long (3-5 years), with high costs in terms of the duties and taxes on profitable companies and in particular on employee income, see micro-enterprise tax and other taxes are about to come.

The entry into insolvency of the major real estate developers and network retailers has made market fluctuations, blocking the flow of money in the banking and suppliers’ circuit. In the same time, more companies resort to voluntary insolvency as a mean of protection from the creditors.

Romania went from 6-7% growth over the past three years to a brutal loss of over 7% in 2009. At the beginning of the year, the Government still bet on an unrealistic growth of 2%, which did not materialize.

Unemployment during his 2009 race and growth will continue in 2010. Over 750,000 people who have entered or will enter the next period in unemployment will spend less, and may experience difficulties in paying rates. Unemployment will occur inevitably also in the budgetary sector with high salaries and appropriate rates will strongly influence the exposure of banks and their results. Even at the end of 2009 the level of bad loans reached to over 14% of the total, at a level of around 2 billion euros, predominantly in the companies, a trend that will continue in 2010 with repercussions on crediting.

Following the loan from the IMF and European Bank, Romania became a net debtor country, with long-term effects on population income, and also on living standards. The effects will be seen by the boom in all categories of taxes, on work, income and property – the effect on the value of the latter will decrease the price of competitiveness of Romania’s workforce, but assets will be cheaper.

Banks will not exceed the financial crisis in 2010 because of bad loans and the continuing high cost of external financing due to low country rating. It should be noted that the difficulties of Greece and Austria’s exposure to Eastern Europe in crisis (Ukraine) whose banks dominate the Romanian banking landscape. Despite interest rate reductions in the second half, the credit markets remained frozen. 70-80% of the number of banks have registered losses in 2009.

Property losses caused by price decreases (the apartments are around 30-40% of the peak value achieved in 2008) shows virtually blocked investments.

It will follow a slow recovery together with the market’s maturing in line with the real growth of productivity and income of the population. The real estate sector, will be completed some projects started in 2008 and fewer good quality projects in favourable areas that will be started in 2010. For constructions from the residential area, the price will start from other levels of land prices, higher quality, reasonable profit margin of the developers and real consumer-driven, consistent with funding bids and prices by 5-10% lower.

We value growth at around 0% (± 1.5%) in 2010 and approx. 2-3% in 2011, in an optimistic scenario, following that in 2012 it will return to rates of over 4-5%. Also in an optimistic scenario, the end of 2010 will be the beginning of stability, appearing the first signs of crisis overcoming, and 2011 will most likely be the first year of a stronger recovery.

Real estate industry, important part of the economy will get back with 6-12 months after the basic industries of the economy, unlike the stock market, which has an anticipatory nature, being already in a positive development.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market, Valuation english, financial crisis, First House, real estate, real estate industry

The valuation done by Darian was a desktop work and had as a basis almost entirely the information made available by the journalists and also public sources, the accuracy of the results being limited by its quality.

The estimation of the value of a fortune was focused on the valuation of the owned real-estate, residential ones (houses, villas, and land) with personal utility, or industrial types, agricultural, commercial or the ones currently being developed. In the case of properties with personal utility the current market value was taken in consideration, while in the case of investments with a significant real-estate basis the higher value between the real-estate and the business was considered. For the development projects their stage was considered, regarding the contribution of the land value with specific elements (project, urbanism, authorizations) more than the value of unfinished buildings, taking in consideration the fact that these are usually made with loans with high financial costs and have declining values due to their uncertain selling (specifically, big projects). For residential projects that are in a finalized stage what was measured was the profitability that a medium investor can obtain it, from selling a location at the level of 2009. In the estimation of values was not taken in consideration the level of personal debt (if it existed) or patrimonial litigations, as there was a lack of information in this area.

The significant decrease of fortunes is, in most cases, due to the depreciation of the value of properties and assets on the capital markets, the only increase being registered by the ones that finalized projects and sold in 2008 significant assets at high prices or the ones that operate in industries that were not too much affected by the crisis. Also, the speculative character of the real-estate market diminished dramatically specifically for lands or projects for which the values decreased tremendously.

Dr. ec. Adrian Crivii, FRICS, MAA

Valuation english, Forbes, valuation

If we discuss further on the two most important pylons that generated the crisis (the financial crisis and real estate industry), we should follow also the necessity of their restructuration under the human resource aspect.

In the last 5-6 years the explosive growth of the number of loans and the fight of the financial system for market shares lead to a sustained growth of the number of employees. Unfortunately, the Romanian learning system, whose quality dramatically declined in the last decades, could not supply enough specialists for this area. As many efforts and spending made the financial system; its employees were not at the required level for these moments. This fact is due to the fierce competition between banks when it comes to personnel hunting, conditions in which the wages offered to employees have been in some cases above the market level without any connection with the professional performance.

The crisis will make also in this area things to go back on the right track together with the inevitable process of consolidation of the financial system.

If we talk about the real estate industry, we should make a difference between the construction industry and the real-estate consultancy. As we know, many Romanians emigrated after the opening of the Shengen doors and many of them work or qualified in this field. Unfortunately, in Romania, with little exceptions, the companies did not have access to qualified personnel and hired individuals with unemployed profile. Nevertheless, I believe that a great deal of companies operating in this field will disappear because of this crisis and the number of unemployed will significantly rise in this sector.

Regarding the real-estate consultants, in this field were hired persons with communication and sales skills, and persons with a “high appetite” for fast gains, without the obedience of specific ethical standards or continuous efforts of improving the professional level being necessary. Currently, their number was drastically reduced and probably the quality of consultancy will rise, remaining in this field only the ones that are or who they could become truly professionals.

An important aspect about the valuation consultants (their number raised spectacularly in the last years, primarily as an answer at the demand of the banking system): I believe that a large number did not understand that valuation is a consultancy activity, it assumes continuous preparations, professional and ethical standards, and not just selling a regular product (merchandise), serial and made to order valuation. The ones that are part of this category will have difficulties concerning their activity in this area. I believe that for the valuation-consultants the role of professional association ANEVAR will be important in the creation of a barrier at the entrance in this profession, because of the requirements and the quality needed by the new regulations that will inherently appear in the financial industry in the aftermath of crisis.

Dr. ec. Adrian Crivii, FRICS, MAA

Financial Crisis, Real Estate Market, Valuation anevar, english, financial crisis, real estate, valuation

In these difficult moments for the real-estate industry, the valuation prefession confronts a new challenge generated by the program „First House”.

In our opinion, the governmental program, with a strong social character, will have an insignificant economic impact mainly due to its dimension and the narrow segment of eligible persons to which is addressed. Taking in consideration the type of residential properties that are going to be valued, it should take into account all the three approaches.

If properties in development are acquired, the cost approach should take into consideration the descending prices of the land, construction materials and labour. Another element that should not be neglected is the significant adjustment of the developer’s profit, which got at a level in concordance with the new market conjuncture.

The income approach has to take into consideration the strong descending evolution of rent from the last period and the fact that outside the well developed cities and the university centres there is no sustainable rent market. The pronounced demographic decrease, the emigration and the large percentage of Romanian house owners are direct causes of this phenomenon.

With respect to the selling comparison approach which is the most suitable for the valuation of finalized and ready to use properties when the market is active, both the valuator and the financing consultant will have to take into consideration the following:

• The market segment accessible for the “First House” was influenced by this program, bringing a 15% increase on the selling prices, because for now, the program implies low financial costs (Euribor will not remain at this level in the long run).
• The location and the intrinsic quality of the property can retain the value in the long term; therefore these have to be carefully analysed.
• Even if the loan is guaranteed by the state, it shouldn’t be neglected the nature of bank guarantee, with all the inherent risks.

One solution to this problem could be for the real-estate consultants and banks to promote the mortgage landing value (MLV) as it is provided by the 2006/48/EC Directive of the European Parliament and agreed by the European Federation of Mortgage Banks (EMF).

In essence, this approach is based on a prudent estimation of future selling of the property which takes into account the sustainability aspects on the long term, the normal and local market conditions, adequate current or alternative exploitation, without taking into consideration speculative aspects.

A conclusion that should be drawn from this real-estate crisis and this program is that in the future the market (the consumer) will prioritize the quality of the property and not the financing conditions (almost standardized in the “First House” program). In the long run, the standardization of the financing conditions is going to increase due to the consolidation and development of the local financial institutions, the increased regulation and the improvement and the application of the European legislation concerning consumer safety.

Even if today the ones that qualify for this program benefit in comparison with the ones that took loans in previous years, the credit risk is significantly high, even though in this case the deficiency of the guarantee are taken by the state.

To draw a conclusion on this, although this is how the program First House should be lead, in reality the evaluation brings up the same value found in the pre-contract signed by both parties. So no standards or professionalism are really required (sic!).

Adrian Crivii, FRICS, MAA

Financial Crisis, Valuation english, financial crisis, First House, valuation

The government decision to encourage the purchase of a first house is a good one, likely to activate the real estate market and save some of the developers who will feel this opportunity and will treat it appropriately. Unfortunately, if you take into account the proportion and the relatively narrow segment to whom it is addressed, the program will have a low economic effect, although it will boost a little the residential market.

Given that the economic situation continues to regress, we cannot consider that this measure will have as an effect an increase in the residential property value. The shy demand encouragement will not have the same effects as those of previous years (the decrease of interest rates, the increase of the term loan), because in the past the encouragement of demand was complemented by an upward economic trend, and accelerated revenue growth. Now, because of the economic situation with stagnant wages and explosive growth in unemployment the solvent demand is reduced and fragile.

It should be also noted that the negative evolution of the economy can not lead to price increases and who expects something like this must consider this scenario only desirable, in an uncertain future, after the economic recovery and very unlikely at the level before.

I’d like to make some assessments regarding the values which will be anchored in this specific context. The return of residential property market with “the feet on the ground”, because of the crisis, will make the prices of apartments to reach 500-1.000 euro / sqm, depending on location, prices accessible and consistent with the market segment represented by most Romanians. If you take into account that in Romania the number of owners is very high (about 80% of Romanians have at least one property), I think the price above is realistic.

From now on, developers’ offer (most are in financial difficulty) will press on those who sell old apartments as well, forcing them to adapt to the solvent demand of the moment.

Other issues should be also taken into consideration – one is the total collateral of the state with the guarantee fund, which makes banks obtain an easy profit with minimum risk of this new product. Another aspect is the difference between the First House clients and other customers in the system who, meeting the criteria of First Home Mortgage, took recent mortgage loans at a significant higher cost.

Soon I will treat the subject of valuation at “First House” Program.

Dr. ec. Adrian Crivii, MAA, FRICS

Financial Crisis, Valuation english, financial crisis, real estate, valuation